The Economics of Dependency

How Countries Hit the Demographic Sweet Spot

Demographics are among the most important influences on a country’s overall economic performance, but compared with other contributors, such as the quality of governance or institutions, their impact is underappreciated. Demographic factors, such as the age structure of a population, can determine whether a given economy will grow or stagnate to an even greater extent than can more obvious causes such as government policy. One of the most consequential aspects of demographics as they relate to the economy is a phenomenon known as the “demographic dividend,” which refers to the boost to economic growth that occurs when a decline in total fertility, and subsequent entry of women into the work force, increases the number of workers (and thus decreases the number of dependents) relative to the total population. The demographic dividend has contributed to some of the greatest success stories of the twentieth century, and countries’ ability to understand and capture this dividend will continue to shape their economic prospects well into the future.

BABY BOOMS

Prior to the twentieth century, the age structure of most populations could be visualized as a pyramid. High fertility and mortality rates meant that the very young, who formed the wide base of the pyramid, were always the most populous group in a society, with a shrinking number of people in each successive age range forming the narrowing sides of the pyramid, culminating in the top, which contained a small number of the very elderly. In such societies, the “dependency ratio,” or the ratio of dependents to workers—defined by the UN as the number of people under 15 and over 64 years old divided by the number of those between 15 and 64—was more or less stable, meaning that there were at most times a steady and sufficient number of workers to take care of dependents, made up of children and the elderly. Only large wars, pandemics, or deep economic crises disrupted the shape of the pyramid.